Question

It costs Orkid Company $17 of variable costs and $3 of fixed costs to produce its product. The company currently has unused capacity. The product sells for $25. Homer Industries offers to purchase 5,000 units at $19 each. In the deal, Orkid will incur special shipping costs of $1.50 per unit. If the special offer is accepted and produced with unused capacity, net income will:
A. increase $2,500.
B. decrease $5,000.
C. increase $10,000.
D. decrease $30,000.

Answer 1

Answer: Option (A) is correct.

Explanation:

Given that,

Variable costs = $17

Fixed costs to produce = $3

Product sells = $25

Homer Industries offers = 5,000 units

Unit selling price = $19

Shipping costs = $1.50 per unit

Net profit = Unit selling price - Variable costs - Shipping costs

                = $19  - $17 - $1.50

                = $0.50

Total increase in profit = 5000 units × Net profit

                                      = 5,000 × 0.50

                                      = $2,500